Bad loans dog First Horizon as bank grows market share

Bad loans dog First Horizon as bank grows market share

First Horizon Corp., parent company of First Tennessee, lost 45 cents per share in the third quarter, after the bank found out it may have to buy back bad mortgages it had sold to Fannie Mae in the years leading up to the financial crisis.

The $200 million that the bank must add to its repurchase reserve drove a net loss of $107.5 million, compared to a gain of $25.8 million in the third quarter of 2012.

"Like we always do, we'll deal with our past when it happens, but we'll continue to focus on our future, which is bright," said BJ Losch, chief financial officer at First Horizon.

Without the forced repurchase of delinquent mortgages, First Horizon would have earned 19 cents, in line with Wall Street estimates and better than the 10 cents the bank earned in the third quarter of 2012.

The news sent shares of First Horizon tumbling 3.76 percent Friday to close at $11.01 per share, though the bank was buoyed by positive trends in other areas of its business.

In the course of the quarter, First Tennessee became the biggest bank by deposit share in the entire state of Tennessee, squeaking by Regions Bank with a 14.03 percent share, or $16.6 billion in deposits from $15.8 billion last year, according to the FDIC.

"We're pretty much dominating Hamilton County, which is about at 2 percent growth," said Keith Sanford, market president for First Tennessee. "Our two biggest competitors both shrunk."

Over time, the bank's pro-growth policy can lead to increased fees, more revenue, and more customers to cover the fixed cost of the bank's branch network. But like at many banks, revenues continued to fall during the quarter, shrinking 8 percent to $309 million during the quarter, due in part to an 8 percent decline in net interest income to $160.7 million.

While the bank is doing the best it can to bolster profits, some loss in top line growth is inevitable in the current environment, said Losch.

"Because of the economic environment, borrowers are cautious, therefore those opportunities aren't what we'd like them to be," Losch said. "On the flip side, the industry is changing, and regulation is coming out of Washington in a material way, which has taken a significant amount of revenue out of banks. You put all that in a bucket, and revenue is challenged."

Since all banks are facing the same pressures, First Tennessee has worked to lend to the best clients it can find, reduce expenses and grow net income, aside from one-time charges.

"Over the long term, we want to grow revenue, and we pay to grow revenue," Losch said. "I'd love to see new expenses go up related to new business that we're putting on the books, and that's going to happen one day."